Capital and Employment. A Study of Keynes's Economics

218 Pages·1982·14.065 MB·English

by  Murray Milgate and John Eatwell (Auth.)

STUDIES IN POLITICAL ECONOMY
edited by John Eatwell
Capital and Employment: A Study of Keynes's Economics,
Murray Milgate, 1982
Gifts and Commodities, C. A. Gregory, 1982
The Economic Structure of Backward Agriculture, A. Bhaduri,
1983
CAPITAL AND
EMPLOYMENT
A Study of Keynes's Economics
MURRAY MILGATE
1982
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Bntish Library Cataloguing in Publication Data
Milgate, M.
Capital and employment.—(Studies in political
economy; 1)
1. Keynes, John Maynard 2. Keynesian
economics
I. Title II. Series
330.I5'6 HB99.7
ISBN O-I2-49625O-5
LCCCN 82-73227
Photoset in Great Britain by
Rowland Phototypesetting Ltd, Bury St Edmunds, Suffolk
and printed by St Edmundsbury Press,
Bury St Edmunds, Suffolk
Series Editor's Preface
The revival of the analytical principles of classical political economy
that has gathered pace since the mid-1960s has been based on the firm
foundation of a logically coherent theory of value and distribution. It
was the failure to provide this foundation which for many years
confined the classical approach to being, at best, a repository of useful
ideas on growth and technological progress (Smith's discussion of the
division of labour and Marx's dissection of the labour process being
good examples), or at worst, identified with simple-minded devotion to
the labour theory of value as the 'qualitative' expression of capitalist
exploitation—the position to which Hilferding retreated in the face of
Böhm-Bawerk's critique of Marx, so depriving the surplus approach of
any quantitative significance as a theory of value and distribution. The
publication of Piero Sraffa's Production of Commodities by Means of
Commodities changed all that. Sraffa not only generalised the mathema
tical solutions to the surplus approach which had been advanced by
Dmitriev and Bortkeiwicz, but also presented the analytical structure of
the surplus approach with stark clarity. Moreover, Sraffa provided a
critique of the neoclassical theory of the rate of profit and so of the entire
neoclassical explanation of value, distribution and output—hence
clearing the ground for the redevelopment of classical theory.
With the analytical core now secure, attention can be turned to the
development of other facets of classical and Marxian theory and to the
empirical insights which this theory provides. In stark contrast to the
neoclassical approach, which reduces all economic activity to a single
principle—the competitive resolution of individual attempts to maxi
mise utility subject to the constraints of technology and endowment—
classical theory is constructed from a number of analytically separable
components. The core of the theory, the surplus approach to value and
distribution, takes as data the size and composition of output, the
technology in use (the conditions of reproduction) and the real wage (or,
in some cases, the rate of profit). These data do not, however, lie outside
the realm of economics (as, for example, the neoclassical economists'
utility functions do). We need to provide theoretical explanations of
VI SERIES EDITOR'S PREFACE
their determination. Hence Smith, Ricardo and Marx advanced
theories of the real wage and of the level of output (Say's law in the case
of Ricardo), and Smith and Marx presented detailed analyses of
technological change. Assembled around the core, these theories are the
building blocks of a general theory of the operations of the capitalist
economy. There is in all this a clear danger of constructing a disjointed
ad hoc collage of theories and empirical generalisations. This is avoided
by enveloping the entire edifice in a general characterisation of the
economic system: the clear specification, that is, of the capitalist mode
of production. This serves both to cement the elements of the theory
together and to eliminate propositions that do not fit.
This series of books is devoted to studies which develop and extend
the classical framework. Broadly, there are two jobs to be done.
First, the classical theory itself must be developed and generalised.
All the elements surrounding the core analysis of value and distribu
tion—theories of output and employment, of accumulation, of technol
ogy, of the wage, of competition and so on—require reassessment and
'modernisation' in the light both of Sraffa's results and of the many
changing facets of the modern capitalist system. This will involve both
theoretical development and empirical analysis. For one of the import
ant characteristics of classical theorising is the manner in which theory
is grounded in the socio-economic data of the system under considera
tion. The institutional environment is an essential part of the theory.
Second, the rejection of the now discredited neoclassical theory
throws open a wide range of problems in international trade, develop
ment economics, fiscal and monetary policy and so forth, into which the
classical approach can provide new insights. In part these will lead to
the refreshing task of debunking the policy prescriptions of orthodox
theory which revolve primarily around the fundamental theorem of
welfare economics and the supposed 'efficiency' of competitive mar
kets. But there is also a positive job to be done. The reconstruction of
economic theory will inevitably precipitate a reinterpretation of econo
mic policy and problems.
In this book Murray Milgate pursues the task of reassessing Keynes's
theory of effective demand in the light of developments in the theory of
value and distribution. The argument sweeps away the considerable
accretion of confusion that has built up around the theory of output and
employment since the publication of Keynes's General Theory, confu
sion which has stemmed primarily from vain attempts to integrate
SERIES EDITOR'S PREFACE Vil
Keynes's ideas into the corpus of neoclassical theory by means of a
variety of arbitrary assumptions—'sticky' wages, the effects of uncer
tainty and expectations, short run rigidities and the like. Milgate not
only presents a more coherent interpretation of the debates surrounding
Keynes's ideas than has hitherto been available, but also points to the
important theoretical compatability between the classical analysis of
value and distribution and Keynes's theory of output.
John Eatwell
Trinity College, Cambridge
September, 1982
Preface
This work is offered as a contribution to a new and promising line of
inquiry into Keynesian Economics opened up by the recent contribu
tions of Pierangelo Garegnani. It has its roots in the economic theory of
the old Classical Economists from Adam Smith down to Marx and,
more recently, Piero Sraffa. Its essential ingredient is the rejection of
the orthodox marginalist vision of the economic system operating
according to the principles of demand and supply theory. This work
seeks to show that not only is this the upshot of recent controversies in
the theory of capital, but also that it is the course suggested by Keynes's
contribution to the theory of employment. Its primary aim is to
re-examine the nature of Keynes's contribution to economic theory
and, following from this, to review critically dominant contemporary
interpretations of Keynes's work. The work also seeks to isolate the
linkages which exist between Keynes's theory of output and employ
ment on the one hand, and the surplus approach to value and distribu
tion of the old Classical Economists on the other. While the primary
focus of the work is, so to speak, theoretical, its central conclusions
embody important messages for the conduct of economic policy. In
particular, while they suggest that the adoption of Keynesian policies is
desirable, they also imply that this does not entail a return to those
simplistic 'fine tuning' policies that became the norm after the Second
World War. If the interpretation of Keynes's contribution that is given
in this work is accepted, it implies the need for a much more interven
tionist stance than has hitherto been thought to be theoretically justi
fied.
I should like to thank Dr John Eatwell for his aid and advice over the
period which led up to the completion of this book. I should like also to
thank Professors Pierangelo Garegnani, Luigi Pasinetti and Joan
Robinson for their comments on earlier drafts of parts of this work.
Though my reading of Keynes may not concur, on every point, with
theirs, it will be obvious to the reader how profound has been their
influence upon my thinking. It goes without saying that all errors and
misinterpretations are my own responsibility.
MURRAY MILGATE
Cambridge, June iç82
I. INTRODUCTION
It appears to me that one great cause of our difference of opinion ... is
that you have always in your mind the immediate and temporary effects of
particular changes—whereas I ... fix my whole attention on the perma
nent state of things which will result from them. Perhaps you estimate
these temporary effects too highly, whilst I am too much disposed to
undervalue them. To manage the subject quite right they should be
carefully distinguished and mentioned, and the due effects ascribed to
each. (Ricardo to Malthus, 1817, in Ricardo, 1951—1973, vol. VII, p.
120).
Controversy over the significance of Keynes's General Theory as a
theoretical work has continued virtually undiminished since its publi
cation in 1936. However, although a wide variety of themes have been
aired, two basic issues have been central to the questions that in
terpreters of Keynes's work have sought to resolve. On the one hand,
there has been the attempt to reveal the precise nature of the construc
tive theoretical contribution of the General Theory and, on the other,
there has been the consequent attempt to provide an understanding of
the significance of Keynes's ideas as a critique of received opinion. Of
course, these two issues are not unrelated. Any interpretation of the
General Theory must seek to resolve them both. But a separate treatment
of these two topics provides a particularly clear and precise way of
approaching the problem of the interpretation of the General Theory.
For this reason the present examination of Keynes's contribution, and
the associated critical analysis of subsequent interpretations of the
General Theory, will be developed by addressing each of these issues in
turn.
1
2 CAPITAL AND EMPLOYMENT
A. THE CONTEMPORARY POSITION OF 'KEYNESIAN'
ECONOMICS
If one considers the dominant contemporary interpretations of the
General Theory, two important sub-divisions may be isolated. There is
one school that regards the constructive contribution of that book to
consist exclusively of an examination of the short-period behaviour of
the economic system. That is, the General Theory is seen to provide a
detailed analysis of what Ricardo referred to in the passage quoted at the
opening of this chapter as the temporary effects of particular changes.
Accordingly, the significance of the General Theory as a critique of
received opinion is, at most, that it draws our attention to the fact that
the underlying forces working towards the establishment of long-period
equilibrium, while always present, are only weakly felt. The basic idea
is that the economic system may become 'stuck', so to speak, in a
short-period position where certain frictions or rigidities prevent the
systematic forces outlined by orthodox marginalist theory from produc
ing those permanent effects that they ultimately have a tendency to
produce.
This view may be associated, in particular, with the interpretations
advanced by Hicks in his famous 'Mr Keynes and the classics' paper of
1937, and by Modigliani in his equally celebrated paper 'Liquidity
preference and the theory of interest and money' of 1944. Interestingly,
it was also the position adopted by Pigou in his self-styled recapitulation
on the question of the significance of the General Theory in 1949, where
it was argued that Keynes's purpose was to deal with "fluctuations over
short periods" as distinct from questions about the "ultimate equilib
rium" of the system (Pigou, 1950, pp. 3-4). Subscribing to the same
school of thought, Schumpeter in his History of Economic Analysis was
led to the conclusion that it would have been better had Keynes not
objected to the tendency towards full employment "just as we do not
object to the law of gravitation on the ground that the earth does not fall
into the sun"; rather Keynes really meant "that. . . though it states a
tendency correctly, [its operation] is impeded by certain facts" (1954,
p. 624). Though it will be necessary later to define these terms more
precisely (for the notion of equilibrium itself has changed in recent
years), the general tenor of these interpretations is captured in the idea
that Keynes's contribution was to 'disequilibrium' rather than to
'equilibrium' analysis.
I. INTRODUCTION 3
So complete has been the triumph of this theme in the practice of
Keynes's interpretation, that its presence is apparent everywhere in
much more recent re-interpretations—despite the fact that one signifi
cant alteration (to the notion of equilibrium), which will be mentioned
in a moment, has been introduced. Thus, for example, in the well-
known contributions of Leijonhufvud the essential ingredient of the old
view is still to be found. "Of course", Leijonhufvud writes, "Keynes
used the term 'unemployment equilibrium'. [But] ... it is not an
'equilibrium' in the strict sense at all. It is preferable to use some more
neutral term which does not carry the connotation that no equilibrating
forces at all are at work. The real question is why . . . the forces tending
to bring the system back to full employment are so weak" (1969, p. 22,
n. 1). Similarly, in his study of the development of Keynes's monetary
thought, Patinkin (1976) concluded that Keynes's theory is not "strict
ly speaking" one of "unemployment equilibrium" (p. 114 et seq.). And
James Tobin, in a recent exposé of the shortcomings of modern
monetarist doctrines, although at one point recognising that Keynes
"denies the existence of self-correcting market mechanisms . . . [even]
in a competitive economy" (1980, pp. 1-2), refrains from drawing the
radical conclusions that would follow from this assessment and falls
back instead on the idea that Keynes showed (only) that "disequilib
rium can be protracted and stubborn" (p. 19). Indeed, a list of the
names of those writers in whose work this familiar theme is present
would be enough to dominate, if not fill, the membership of an
economics Hall of Fame.
However, the popularity of this view does not render it correct. The
interpretation of Keynes's contribution that is presented in these pages
breaks away entirely from this line of argument. Its starting point is to
take seriously Keynes's claim, universally and disingenuously rejected
as being not quite accurate by orthodox interpretations, that the
dominant and systematic forces at work in market economies do not
tend to produce the full employment of labour. Instead of arguing that
Keynes shared with orthodox economics the same abstract character
isation of the mechanisms through which market economies operate
and differed by claiming that these mechanisms were not always as
beneficent in the actual world as they were in theory, it will be my
central contention that Keynes in fact rejected the orthodox character
isation of the operation of the market mechanism. In short, in the
General Theory Keynes provides us with a theory of employment